What does the Leasehold and Freehold Reform Act 2024 mean for you?

In order to provide leaseholders with long-term security and reduce the need for future extensions to their lease terms, the Act allows for statutory lease extensions of 990 years. 

Under existing legislation, the statutory terms for lease extensions were 50 years for houses and 90 years for flats, meaning terms have to be extended more frequently, and the freeholder sees more frequent capital windfalls.

This is a significant change in favour of leaseholders. 

As yet, until more is made clear by new regulations, the comparative cost of extending by 990 years rather than the shorter 50- or 90-year terms is not clear.

When a leaseholder extends their lease, their property will likely become more valuable than if it had only a short lease. 

This ‘profit’ is referred to as ‘marriage value’. Under current legislation, when a leasehold property has a lease term of less than 80 years, the marriage value must be shared with the freeholder. The sum payable to the freeholder to extend the lease term increases significantly. 

The Act proposes to abolish this rule, significantly lowering costs for leaseholders when extending their lease term when it is under 80 years.

Freeholders will be negatively affected by this change.

The Act requires that service charge budgets, invoices and statements must be presented in a standardised format. The aim is to make it easier for leaseholders to interpret and therefore challenge service charges invoiced to them.

Leaseholders will no longer be required to cover their freeholder’s legal costs when disputing these charges. 

While this will lift the financial burden from leaseholders, and make it easier for them to resist certain charges where appropriate, the legislation has the potential to increase the number of challenges brought to freeholders, leading to them incurring significant legal costs in defending them.

When the Act comes into force, the sale of new leasehold houses will be banned, subject to a limited number of exemptions.

Both leaseholders and freeholders stand to benefit from this provision. 

The Act will provide freeholders with similar protections to those of residential leaseholders by regulating estate management charges. 

Additionally, it will require freeholders that directly manage properties – whether a landlord or an estate management company – to belong to a redress scheme, providing leaseholders with a clear route to follow when addressing complaints. 

This requirement will enhance leaseholders’ rights to challenge unreasonable charges and practices and extend the pre-existing protections for properties managed by agents.

Under the Act, the requirement for leaseholders to own their property for at least two years before they can extend their lease term will end. This will avoid the impact this requirement has on sales, as well as the lease term reducing and the cost of then extending the lease term increasing.

At present, if more than 25% of a leasehold’s floor space is non-residential, leaseholders cannot either buy their freehold or take over management of its site. The Act will increase this 25% bar to 50% to allow more leaseholders to utilise the right to manage or to a collective enfranchisement.

Save for certain exceptions, legislation in 2022 banned ground rent in new leases.  However, the Act will not introduce a cap on existing ground rents. It remains to be seen what may be brought in by the new Labour government in relation to increasing ground rents in existing leases.